But I can only afford a doll’s house

‘Two-thirds of 8,000 20- to 45-year-olds who do not own homes now believe they have no hope of ever purchasing one.’ The Financial Times, May 18

“Dad?”

“Yes, my darling?”

“Ed Miliband says that I’ll have to wait until I’m 40 before I own my own home. Is that true?”

“Who can say, my dear? You already own a modernist doll’s house and a sugar-pink play house. Let’s not wish our days away, shall we?”

“But houses are so expensive.”

“You’re telling me. That hand-crafted wooden one cost a fortune and I hardly ever see you playing with it. And grown-up houses are expensive, too.”

“Why?”

“It’s partly supply and demand. While the Labour government was in power, we had open borders, meaning more people came to live in the country. And we had tough planning restrictions, which made it hard to build new houses. So rent and house prices had to rise until people were forced to cram themselves into small homes. Financial regulation played a role too. Banks were ever more willing to lend implausibly large sums and nobody wanted to stop them. The Bank of England was instructed to target inflation, which made it hard to do anything about a possible bubble. The result was that anyone with any sense was priced out of the housing market.”

“Gosh. I didn’t know. It’s very noble of Mr Miliband to campaign against the legacy of that Labour government. What party is he in, Dad?”

“That’s a little complicated to explain. It’s not clear whether the new government is doing anything very different on these questions, in any case. House prices seem to be falling because the banks stopped funding silly speculative bets, but don’t worry: I’m sure it’s just a matter of time before they start shovelling money out of the door again. Why are you so eager to own a house, anyway?”

“My friend’s Dad says that renting a house is throwing money down the drain.”

“Is he the one who hates his job and hates his boss but can’t move because his house is worth £50,000 less than he paid for it?”

“I’m not sure, Dad.”

“Well, in any case, he may be right and he may be wrong. If you buy a house for £200,000 with a 5 per cent mortgage, you need to pay the bank £10,000 a year to rent its money, before there’s any question of paying off the mortgage itself. Whether it’s cheaper to rent the house or to rent the money is an empirical question. House prices have often gone up over time but so have share prices.”

“Oh.”

“There’s a decent argument that everyone should borrow a few hundred thousand pounds, use it to buy shares, and gradually pay off the loan – seems to me just as sound as taking out a mortgage. Either way, it’s a risk. Buying a house does hedge you against future fluctuations in house prices, but it’s what we call a ‘leveraged bet’. They don’t always work out so well.”

“Everyone says there’s no substitute for owning a place of your own.”

“That’s true. If you were renting a house there’s no way the landlord would let you trash your bedroom the way your mother does. But there are disadvantages to owning a house, too. The economist Andrew Oswald reckons that unemployment is positively correlated with home ownership. That may be something to do with people struggling to move to where the jobs are, or more likely, the fact that every spare penny of investment capital is sucked into the housing market rather than being invested in new businesses. Remind me to tell you about the 2007 credit crunch.”

“Dad, they’re calling us ‘generation rent’. I don’t want to be part of ‘generation rent’.”

“Sticks and stones. I’m not sure quite what the problem is supposed to be. I agree it’s terribly expensive to own a house, and it’s very hard to get a mortgage to buy one unless you’re already rich. It’s hardly surprising that very few houses are changing hands – which means we don’t really know what the price of an average house is, because we have so few data points. But house prices do seem to be falling. So I wouldn’t pity ‘generation rent’. I’d pity the people who are slightly older and bought at the wrong moment. Let’s call them ‘generation negative equity’. Now, back to your doll’s house. With any luck you can forget about the topic for a couple of decades.”

6 Comments

B says:

It’s too simplistic to just say pity generation “negative-equity”. Boomers have benefited from this mess and are now unassailable in their position at the top of the heap. We should not condemn the next generation to high rents, paying off the boomer debt mountain, simply because they are getting a bad deal but not the worst deal. The number of people who bought after 2003 will be smaller than the next wedge of people who are paying for the boomer’s mess.

When I left school in the ’60s I thought I would never be able to afford a house. When my wife left uni in the ’80s recession she thought the same. Every generation thinks they have it hard, but end up better off than the last. Housing booms and busts are part of the furniture. Some countries rent a lot some buy a lot. Some live mostly in flats, some in houses. all think that is normal. There is no right way. All have pros and cons.

“every spare penny of investment capital is sucked into the housing market rather than being invested in new businesses”

I wonder how many of us would willingly offer our hard earned disposable income(after rent) to new business ventures. Most people in the Uk have little or no idea about true investment, but they can get their head around home ownership(just!).

And surely money spent improving or updating ones home is money spent within the economy…. Or are U saying that the money I spent in homebase/ B&Q/ wicks doing up my home contributes nothing towards the economy. & the new cpts and furnishings from M&S mean nothing……..Oh yes, you are right, I should stop spending on my home and invest in the shares of those companies instead……but if we all take that view where will the customers come from. Oh I’m confused now….NOT.

I quite fancy the idea of borrowing a few hundred grand off the bank to invest. In fact, who better to manage those investments than the bank? They could offer a managed service. In fact, why not advance me the proceeds right now? I could use the wonga to buy a house.

The real problem is that there’s a huge tax advantage in investing the money in your own house. Invest in the stock market, as you suggest, and use the dividends to pay rent, and you’ll pay up to 50% income tax on the dividends as well as capital gains tax on any profits.

Invest in your own home and it’s all tax free (except for stamp duty when you buy)

Seems like a poor tax system to me: the government discourages more productive use of capital and gives a strong incentive for people to buy and stay there for as long as possible (discouraging mobility for jobs, and increasing commuting).